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Economy

What Is A Good Unemployment Number, Really?

Originally published on Thu January 3, 2013 6:50 am

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STEVE INSKEEP, HOST:

New unemployment and employment numbers come out for December tomorrow. And today, we'll try to figure out what perspective we should have on those numbers. Now, in the previous month's report, the unemployment rate dropped to 7.7 percent, which is a four-year low.

Nariman Behravesh is chief economist at IHS Global Insight, an international consulting firm. And he says it may be time to rethink what a good unemployment number is. We start here with a definition of full employment.

NARIMAN BEHRAVESH: Well, full employment is defined as basically everybody who's looking for a job or is looking to be employed is, in fact, employed.

INSKEEP: The first time I ever heard of this concept - when I was a teenager, maybe -people talked about full employment as being about a 5 percent unemployment rate. They didn't think of the zero percent unemployment rate. They said 5 percent.

BEHRAVESH: Well, and there are issues that won't ever get us down to zero. There's something called frictional unemployment, which is to say there's always going to be people between jobs. So at any given moment, there will be people who are out of a job and looking for a job. There's sort of structural employment issues in the sense that there may be some high-skilled that are waiting to be filled, but a lot of low-skilled workers who won't get those jobs. So there's always going to be some people who are going to be out there who can't quite find a job, but for very sort of straightforward reasons, not because the economy is a mess or because we're in a recession or anything like that.

INSKEEP: OK. So there's some number that's above zero that feels like full employment, or is awfully close to that, that's realistic to hope for. Has that number changed over time as the economy has changed?

BEHRAVESH: That is a number that does change. It changes with demographics. It changes with the business cycle, to some extent. So, for example, in the boom years of the 1990s and the 2000s, a lot of economists thought the unemployment - the full employment-unemployment rate was around 4 percent. Now the view is that just given all the changes that have occurred since the financial crisis, it may be closer to 6 percent. So it is a number that changes

INSKEEP: OK. This is disturbing to hear, because in the early 2000s, there was a recession - as you know very well - and the unemployment rate went up to six percent or so, and that was considered very, very bad. And now you're saying that that might be full employment in our changed economy? That might be the best we can hope for, is six?

BEHRAVESH: Now, the 2000-2001 recession was one of the mildest in the postwar period, whereas, of course, the recession we just went through was the worst since the Great Depression. So it is ironic that the high at that point of 6 percent is now viewed as full employment, basically. It's a little disturbing, but I think that's just the reality of where we are right now, relative to stay where we were four or five years ago.

INSKEEP: OK. So we've got the situation where six percent might be the best that we can aim for. We're in the sevens right now. At least it has, in recent months, been moving in the right direction. What would move it further in the right direction?

BEHRAVESH: Well, certainly, sustained growth ideally closer to 3 percent would help to bring the number down. Unfortunately, over the next year, we're probably only going to get about 2 percent growth, which means the unemployment rate is going to be stuck around sort of seven-and-a-half, maybe a little higher, for probably the better part of this year. But then our view is that the underlying strength in the economy will eventually start to kick in, as housing recovers, as consumer spending picks up, as businesses start to spend. So by the end of 2014, we have a shot at getting below seven and hopefully heading towards that full employment number of 6 percent.

INSKEEP: Are we never going to get to that 1990s-style 4 percent unemployment again in this country?

BEHRAVESH: I think a 4 percent number is probably unattainable in the next, say, five to six years. Again, a lot depends on sort of how the structure of the economy changes. You can never say never. But I would say in the coming decade, we probably will have a very hard time getting down to that 4 percent.